CFO Talks: Business credit cards and personal use

Companies and business entities are formed to generate profits and high returns on the capital invested in them. They do that by using their available funds efficiently. This means they need to spend on things and activities that will add the most value to the business. Spending 500 Euro from your corporate credit card on drinks or a lavish dinner with your friends hardly meets that criteria. In fact, it could lead to the exact opposite effect. Using business credit card for personal use can have an adverse tax effect on your company. Tax authorities rightfully recognize only expenses related to your core business activities as tax-deductible. Having material amounts of personal expenses on the company’s books can trigger tax audits and penalties.Performance KPIs and business analytics rely on the quality of data in your systems of record. Booking expenses that are not related to your business in your accounting system will mess up the reporting data . This can distort your business analyses and can lead to the wrong conclusions.Investors and lenders of the company will most likely be furious when they realize someone is using the money they have put in the company for personal benefits. This could be followed by legal action against the company and a formal request for immediate payback of the investment or loans granted. Loans and investments usually have covenants and restrictions on the usage of company money.

The exceptions?

Now that we have covered why it is not a good idea to using business credit card for personal use, let’s briefly outline who and why usually does that:

1. Owners of small and medium-sized businesses often don’t do a good job separating between personal and business funds. There are a lot of cases in which they use company money as their personal bank account.
2. Employees at any level of the company hierarchy that:

• Try to get better rewards and bonuses (mileage, etc.) through business credit card expenses.
• Want to keep a low usage ratio of their credit cards and maintain high credit scores.
• Need to have access to a higher credit limit for a specific purchase or a series of planned personal purchases.
• Misuse corporate credit cards for personal benefits.
• Made a personal expense transaction by mistake.

What can you do when employee uses company credit card for personal use accidentally?

The first thing you should consider when you have made a personal expense with the company’s business credit or debit card is to find and retain all receipts for that purchase. When charging your business credit card keep in mind the following 8 expensesthat do not belong there.If you are the owner of the business, the next step will be to schedule a meeting with your accountant or tax consultant and discuss the available options to deal with this. Note that delaying such a discussion may limit the number of workarounds available.If you are an employee, the next step (after finding and retaining the receipt for the expense) is to notify your direct manager. You will need to follow company protocol for further actions.Companies usually have incorporated expense policies that cover incidents when business cards are used for personal expenses. Such expense policies will also have a detailed description of what company funds can be used for, what to do in cases of misuse, and who should approve business expenses. This could be your direct manager for up to a certain threshold amount or the CFO above that.Employees will often sign a cardholder agreement before receiving a company credit or debit card. Cardholder agreements empathize with the fact that each euro/ dollar/ pound loaded on the card is owned by the company and should be used for business purposes only. Cardholder agreements can also set specific terms and conditions of usage and/ or refer to the company expense policy.

Consider following actions when dealing with personal spend on corporate cards:

• Ask the employee to return purchased items and the merchant to issue a refund.
• Warn the employee for misusing company cards but don’t deduct anything from the employee’s salary. Typically if this is a one-off transaction made by mistake for a very small amount that cannot be refunded.
• Deduct the amount of personal expenses made from the employee’s paycheck.
• Start disciplinary measures that can include employment termination and legal claims against the employee. In this case, you can also deduct the account of personal expenses made from the remuneration of the employee.
  Mixing up business and personal spend irrevocably affects the company in a negative way, regardless of whether it happens by accident, or on purpose. Addressing this issue is easy with Payhawk. Implementing an expense management tool ensures that all transactions are accounted for. Payhawk's corporate cards make it easy for CFOs and financial managers to enhance transparency in terms of business spend, and as a consequence, boost decision-making. It also acts as a huge empowerment tool for employees, as they have access to company money and are given the opportunity to spend individually - and responsibly. Take a look at how A.T.U transformed its spending operations by adopting Payhawk's corporate cards.